ARE120%20LN05~2008

ARE120%20LN05~2008 - ARE 120 Julian Alston Spring 2008...

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ARE 120 Spring 2008 Julian Alston April 17, 2008 Lecture 5 SUPPLY CONTROLS Housekeeping : Review: 217 Art 3:10-4:00 pm Friday April 25. Homework: Homework #2 due Thursday April 24 Reading: Still chapters 2 and 7 Outline: 5. Supply Controls 5.1 Types of Supply Controls 5.2 Output Quotas 5.3 Nontransferable Quotas 5.4 Capitalization 5.5 Input Quotas (Allotments) and Slippage 5.6 Other Supply Controls
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Recap of Last Lecture Main domestic policy instruments for supporting prices: price support (loans) with government purchases (primary pre-1985) target prices with direct deficiency payments (primary post-1985) Since 1985 we have had both policies together but the loan rates have been non-binding. (Draw simplified figures showing price effects but not welfare effects.) Key differences in terms of effects on prices welfare of consumers (including foreigners) welfare of taxpayers deadweight losses or gains problem of surplus disposal Also, recall that real-world policies are more complicated because of compliance conditions (supply controls) combinations of instruments target prices, loan rates, marketing loans, land retirement, border policies (tariffs, export subsidies, etc.) Policies that aimed to raise farm incomes induced a production response that raised the budget cost of the programs created surpluses and problems of surplus disposal (and international problems) increased the net social costs of the programs. => rising domestic budget pressures => negotiation for multilateral reforms to reduce trade-distorting effects Consequently, commodity programs have become progressively decoupled over time. Decoupling = separating income transfers to farmers from market prices and production. Within the target-price, loan-rate program context, decoupling required payments tied to a fixed base acreage and yield (i.e., a fixed volume) payments must be independent of current planting payments must not be tied to current (or past) prices or yields ( why? ) => a lump-sum payment; rare and difficult to devise. Suppose we replace deficiency payments with a decoupled payment of the same amount => farmers (and society) are better off by the cost saving on the marginal production. Why transfer income to producers through commodity markets? Decoupled payments are transparent, look like welfare, and may be less secure. Program yields and base acreage were fixed in 1985.
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1 5. Supply Control 5.1 Types of Supply Controls Supply controls have been introduced as a part of the package of instruments applied to major U.S. grains as a way of limiting the budget costs of the policies.
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